If anyone has ever asked you for a certificate of insurance, you might have given them a blank stare instead. A certificate of insurance is an important document in the world of insurance that you should understand. It’s a document regularly used between two parties when conducting business to provide evidence that proper insurance is in place. It’s possible that you can be both the party providing someone with a certificate of insurance as well as the one requesting a certificate from someone else.
When two parties enter into a business relationship, it’s common for the parties to exchange insurance information. For example, if you hire a contractor to do some remodeling work on your house, you should require evidence of certain insurance coverages regardless of where you live- Nashville, Oakland, Oklahoma City, Raleigh, Tucson – doesn’t matter. This will protect you in the event of injury or damage caused to others. Your contract should specify the exact type and amount of insurance that the contractor needs to have in place. However, instead of the contractor providing you with complete copies of their insurance policies, a single certificate of insurance can provide you with proof they are in compliance with the requirements.
While there can be multiple versions of the certificate of insurance, the most commonly used forms are supplied by the Association for Cooperative Operations Research and Development, also known as ACORD. These are standardized forms that have preformatted spaces for general liability, workers compensation, and automobile liability insurance. They have built in boxes to be filled by an insurance agent to show what limits of liability are maintained by the party providing the insurance. If you read a certificate of insurance carefully, you’ll see that it contains a wealth of information that gives you a snapshot of the coverages in place.
However, there are some difficulties with certificates of insurance that are accepted as a flaw in the process. While a certificate is good evidence of coverage in place at the time that it was issued, it does not provide information beyond that. If the policy is cancelled, you will not be notified. If there are unusual exclusions in the insurance policy, the certificate will not provide you with that information.
You might wonder why, with its flaws, the certificate of insurance is still the insurance industry standard for evidencing coverage? The main reason is the difficulty of actually certifying coverages with entire insurance policies. As you know, an insurance policy is a rather long and detailed document. It would be unwieldy to send someone an entire insurance policy each time evidence of coverage was required. Additionally, contracts usually call for evidence of many policies so it would entail a transmittal of several large documents. Lastly, insurance policies sometimes contain sensitive business volume information used to generate the annual premium. By providing another party the entire policy, one entity would potentially be exposing its proprietary financial information.
Remember when you are engaged in a business relationship to always request a certificate of insurance from the other party. Even though it may not be a perfect solution, it will still provide you with a tremendous amount of information that is helpful in managing your risk.